Macro Theme:

Major Resistance: $4,200
Pivot Level: $4,150
Major Support: $4,100
Range High: $4,200 Call Wall
Range Low: $3,900 Put Wall

‣ We look for markets to consolidate into the 5/3 FOMC
‣ Bulls may have an edge into May OPEX, as low IV + positive gamma serve to support equities
‣ A break of 4100 is “risk off”, likely invoking a test of $4,000.

Founder’s Note:

Futures are up a few bps to 4140, ahead of todays 2PM ET FOMC. Key SG levels are unchanged, with large support at 4110 (SPY 410) – 4100. Below there is lighter support a 4060. First resistance overhead is at 4150-4160, followed by 4180 (SPY 417).

It was quite a session yesterday, with weakness being driven by heavy stock selling on the open. Financials (particularly regionals) & energy were quite negative, with the broad selling pressure persisting until the EU close around 11:30AM -12PM ET. YTD market leaders like MSFT, AAPL, MCD, etc held up fairly well.

Total US put volume was 22mm, which was on the YTD average of 21mm. The VIX hit intraday highs of 19.50, but it now back to 17.5 – where it was just one week ago (plotted above, bottom pane).

The SPX 0DTE flow was high at 48%, and aggregate SPX deltas (as measured by HIRO) were positive, particularly into the afternoon. This reads as large SPX & SPY call buying, likely both buying to open longs calls, & some closing shorts. This call buying activity mainly outside of 0DTE. Put activity, on net, was pretty neutral. We do however note that our SPX Put Wall shifted to 3900, from 4000.

The point of this recap was to highlight that options were not really involved in the selling, and the S&P held its large support level of 4100 SPX. What should concern market participants is that if options flows were directionally bearish (i.e. put buying) it most likely would have accelerated yesterdays selling, making things much worse. Further we are of the view that >4100 is positive gamma territory which should draw dealer buying into weakness. As we have discussed in recent notes, under 4100 that positive gamma likely flips to neutral and/or slightly negative.

We had recently assigned a bullish edge to markets, favoring large tech, and a benign Fed today could prop bulls back on their feet. IV now is just a bit more elevated, which could invite some vol selling that adds an equity tailwind. 4200 remains longer term resistance.

Bull case aside, yesterday certainly felt like a shot across the “risk bow”, and the price action highlighted the jump risk of these low vol environments (as discussed on Monday). A break of 4100 is “risk off”, likely invoking a quick test of 4050. Over the next several sessions we think a break of 4100 would ultimately lead to a test of 4000. 4000 is a very large options level, and we would look meaningful support there.

While we did not see any material change in put open interest, we do think that yesterday may have placed put sellers on their heels. This could keep put skew bid, which relates to yesterdays note wherein we felt that long vega (i.e. longer dated OTM puts) would perform better now vs last year. Relatedly, recall that VIX call open interest remains just off of all time highs (9.3mm call OI today, vs 4/18 record of 10.1mm), which could increase the vol-of-vol.